Costa Rica's surprise frontrunner favors eventual tax hike

Ruling National Liberation Party presidential candidate Johnny Araya leaves after speaking to the media in San Jose February 3, 2014.

Credit: Reuters/Juan Carlos Ulate

SAN JOSE (Reuters) - A center-left former diplomat who has emerged as the surprise leader of Costa Rica's presidential race vows if he wins a runoff vote to prepare the ground for eventual tax hikes seen as crucial to preserving the credit rating of Central America's No. 2 economy.

Luis Guillermo Solis, an academic who has never been elected to public office, held a narrow lead following Sunday's election, riding a wave of disgust over government corruption. He faces a second-round runoff vote in April against centrist ruling party candidate Johnny Araya.

The supporters of leftist lawmaker Jose Maria Villalta, who came in a distant third, could help propel Solis to victory, though Villalta has not yet endorsed him.

Solis, 55, has said he will not present fiscal reforms aimed at boosting tax receipts for two years if he wins. But he says it is vital to lay the groundwork by first combating tax evasion, government waste and contraband.

"If we manage to build a credible platform against corruption, I think we could convince people it is necessary to raise some taxes with a progressive logic," he told Reuters in an interview on Tuesday.

"I am convinced that we will need fiscal reforms," he added.

Solis won 30.95 percent support on Sunday compared to 29.59 percent for Araya with returns in from around 89 percent of the country's polling centers. Villalta had 17.14 percent of the vote.

Votes from a host of smaller parties, which commanded around 22 percent of the tally, will also be fought over in the next round.

Araya was viewed as the frontrunner ahead of the vote, but his campaign was hurt by corruption scandals that plagued President Laura Chinchilla's administration.

A Solis victory in the runoff would mark another triumph for center-left parties in Latin America, which have gained ground in much of the region in recent years.

Solis, who worked in Costa Rica's Foreign Ministry, surged late in the campaign by pledging to improve the country's ailing infrastructure, overhaul the universal health care provider and stamp out corruption.

The eventual winner of Costa Rica's election will have to tackle growing government debt that totals more than half of gross domestic product.

Solis said he would seek to boost Costa Rica's tax take by about a percentage point a year to around 17 percent or 18 percent during an eventual four-year term, from about 13 percent now.

His government plan includes creating a capital gains tax.

Moody's Investors Service, which rates Costa Rica a cut above speculative grade, revised its outlook for the country to negative from stable in September, citing fiscal concerns.

Solis said he hopes to also attract new businesses to set up shop in Costa Rica's booming free-trade zones, which have enticed the likes of Intel Corp and Hewlett Packard.

"Far from wanting to impose taxes, we are rather looking for a way to benefit the presence of transnational companies working here," he said, adding that he would not change contractual terms for firms already in Costa Rica.

Solis says he is confident he can win the runoff without forging political alliances, but says he will talk to political rivals. Solis and Villalta have not yet been in touch.

"We haven't closed any doors, but for the moment the ball is in the court of the parties that are in the second round," Villalta said at a press conference on Monday.